On the eve of an election year where populism taking over development agenda was a worry, the government presented an interim budget. While the undertone has been a balance between populism and a focus on consumption, it provided a feel-good factor to various sections of the population (farmers, middle class & poor) but with a slight slippage in the fiscal deficit.
On budget financials, the government has built in 10.2 percent & 11.5 percent growth in nominal GDP for FY19E (estimated) & FY20E, respectively. The nominal GDP growth of 11.5 percent budgeted for FY20 seems to be on the higher side. Direct tax & indirect tax collection is expected to rise by 19.7 percent & 14.4 percent in FY19RE (revised estimates) and by 15 percent & 11.8 percent in FY20BE (budgeted estimates), respectively. GST collection target for FY19 has been cut by Rs.one lakh crore and on the RE the government is building in 18.2 percent growth for FY20. Total Expenditure to grow by 14.7 percent in FY19RE and 13.3 percent in FY20BE. The lower expenditure growth in FY20E is on the back of 14.4 percent growth in revenue expenditure and only 6.2 percent growth in capital expenditure.
The gross GSec borrowing has been budgeted at Rs.7.1 lakh crore compared to Rs.5.7 lakh crore in FY19RE, implying higher average weekly issuances of Rs.158 bn compared to Rs.127 bn in FY19. Higher gross borrowing and concerns on the credibility of the revenue assumptions have pushed yields higher. With the government’s adoption of an expansionary fiscal stance and concerns on the elevated core inflation, the probability of monetary accommodation could reduce in the near term.
However, the seemingly structurally benign food inflation along with softening growth should provide space for the MPC to shift the policy stance to neutral. We expect the RBI to cut rates in the forthcoming policy meetings.
However, after some time, receding expectations of a rate cut, heavy GSec supply and a likely reduced pace of OMO purchases in FY20 (around Rs 1 lakh crore vs Rs 3.1 lakh crore in FY29E) will weigh on the bond markets. Benign global conditions, muted oil prices, and relatively more dovish global central banks could cap the sharp downside to bonds. Bond yields need to be in a range of 7-7.5 percent to provide comfort to equity valuations. After budget and going forward after elections market participants will focus on earnings.
Market Outlook: We see the next three-four months very challenging and filled with volatility for Indian markets (i.e. until the final outcome of Lok Sabha elections). Expect Nifty to be range bound till election outcome and then see a directional move on either side after the election results. Post interim budget we see pressure on bond markets to persist as the Gross GSec borrowing of Rs 7.1 lakh crore for FY20BE is quite high as compared to Rs.5.7 lakh crore of FY19RE. Any rise in bond yields could impact equity valuations and equity performance.
Q3FY19 results of Nifty companies are ahead of expectations and provide comfort to FY20E earnings forecast. Top-down market valuations look reasonable with Nifty trading at 16.3x FY20E and 14.1x FY21E. However, there is a wide dispersion in valuation across ‘quality’ stocks and ‘value’ stocks, which renders the top-down valuation view less meaningful. Till the election outcome ‘quality’ stocks will rule but investors may not want to buy them as they are too expensive in terms of valuations. On the other hand, ‘value’ stocks are very cheap but investors may stay away from them as they are not performing and the situation could remain similar till the election outcome.
Portfolio strategy: Expect defensive sectors to continue their outperformance until the election results. FMCG & consumption-related stocks along with Information Technology and few agriculture/rural plays will continue to draw investor interest. Apart from this, the theme of hardcore corporate banks is also playing out and could remain so in the course of the year. We also prefer the capital goods sector driven by base orders, pace of execution and low base
Valuation of mid-cap Index has gone down below that of Nifty but this space is not attracting any investment as of now and the situation could continue to be alike till the outcome of the election result. Hence, it is ideal to focus on good quality large caps for the next three-four months and change stance post-election based on result outcome. If the view is 2-3 years then select high earnings growth mid-caps, with sound management could be accumulated.
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Source: Moneycontrol
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